Damon Taylor writes that 2012 has proved to be a particularly busy year for the Australian superannuation industry – and one during which many funds found themselves trying to do more with less.
As this year draws to a close, Australia’s superannuation industry is entitled to heave a few sighs of relief.
The year 2012 has been a busy one. Indeed, with the constant challenge of investment markets, changing regulatory requirements and the prospect of an entirely new superannuation environment, fund executives have had their hands full.
Yet as busy as this year has been, it has not been without its highlights, and for Paul Schroder, general manager – growth and new opportunities for AustralianSuper, the fact that members’ best interests have been constantly front of mind is encouraging.
“The first thing is the move from 9 per cent to 12 per cent in the SG [superannuation guarantee], so adequacy of contributions is there,” he said.
“You’ve then got this whole regime of legislative change – and no matter where the politics of it lands, no matter where the final policy positions land, most of the debate has been about what’s in the best interests of members.
“You take the FOFA (Future of Financial Advice) reforms, and that’s about members’ best interests; you take the strength of the system and the level of contributions, that’s about members’ best interests; even with the skirmishes about what does SuperStream look like and what’s the design of MySuper, most of the participants have been having that discussion from the point of view of what is in the best interests of the member,” Schroder explained.
“And that’s been a very welcome development.
“It’s been a year of having to do more with less and it’s been a year of really radical, quite significant momentum for change, but fortunately the member has been at the front of that.”
Naturally, the last 12 months have included their fair share of frustrations as well, and for Schroder that frustration centres on member confidence and sentiment.
“For me, 2012 has also been a year where sentiment and feeling towards superannuation as a category has dropped,” he said.
“So at the very time that all the reforms and all the thinking is about trying to capture the best interests of the member, sentiment about super has turned negative, almost certainly as a result of a delayed reaction to the global financial crisis.
“And so despite all the efforts of all the participants in the sector, you’ve still got people losing confidence in superannuation as a sector and not sure about superannuation’s role in their overall individual balance sheets.”
Also acknowledging the superannuation industry’s low consumer confidence, Peter Lewis, head of retirement products at Aon Consulting, said that the slow pace at which legislation had been released was also an all too common complaint.
“One of the frustrating things, and I’m sure many within the industry feel the same way, is that drip-fed legislation doesn’t help,” he said.
“When you’re trying to plan with certainty and looking for confidence, particularly when you’re investing significant sums in infrastructure, you want to be able to do that with clarity and conviction.
“But drip-fed legislation and the way that’s it been handed down through the tranches does make it a much more challenging environment in which to build for the future.”
Yet irrespective of 2012’s challenges, Lewis said that this was undoubtedly an exciting time to be in the superannuation industry.
“With all the legislative change that’s occurring, it’s an absolute opportunity for thought leadership and also to build on what I believe is a world-class retirement income system within Australia,” he said.
“We have an opportunity now to really look into the future and not just think year on year but actually build and look strategically out to the future, out to where this industry that we work in is going to take us.
“Now that’s a very broad statement, but we do tend to get caught up in the year-in, year-out type activities which tend to be refinement or tweaking around the edges,” Lewis continued.
“But this year has really given us the ability to have a think about the big structural changes and it gives us the opportunity to work towards bringing that environment to life.”
Of course, the super industry’s trek towards MySuper and SuperStream is hardly new, and with 1 July 2013 rapidly approaching, one would hope the new environment was starting to take shape.
However, for Pauline Vamos, chief executive officer of the Association of Superannuation Funds of Australia (ASFA), the unfortunate reality is that there are still far too many unknowns.
“We’ve still only got two pieces that are actually through – and that’s SuperStream and governance with respect to APRA’s [the Australian Prudential Regulation Authority] standards-making power,” she said.
“We’re still in a complete state of flux with MySuper, APRA reporting, some of the changes from the Federal Budget and also those coming out of MYEFO (the Mid-Year Economic and Fiscal Outlook).
“There’s still a fair bit of detail around SuperStream, particularly the design of the super payment systems, that is still not clarified as well,” Vamos continued.
A“So there’s still a lot of unfinished business and what that means is that we have a real need to re-examine the legislative timetable and the start dates.
“We have a real need to look at the enforcement and implementation approach by ASIC [the Australian Securities and Investments Commission], APRA and the ATO [the Australian Taxation Office] because as things stand, timing will be difficult.”
Less concerned about the 1 July 2013 implementation date, Russell Mason, Partner - Superannuation for Deloitte, said that APRA had thus far shown itself to be very realistic with regard to reform.
“To date, I think APRA have been very realistic,” he said.
“They’ve been reviewing funds, they’ve been talking to trustees and fund executives all through the year and they’ve been very open.
“I know clients I’ve been involved with have frequently gone back to APRA and said ‘this particular aspect of the standard could be interpreted two or three different ways, we’ve interpreted it this way, are you happy with that?’ And APRA, in the main, have been pretty good and as a result I think they’ll be reasonable if there are any last minute changes or tweaks.
“Yes, things have been released in a piecemeal way but I think most funds, from the big retail to the smaller corporate and industry funds, have coped reasonably well.”
Yet beyond legislative timetables, the key question remains what form this ‘brave new world’ will take. Many pundits have suggested that MySuper, for instance, will break down the traditional divide between industry super funds and retail master trusts.
Indeed, Lewis believes this is likely – but he hastened to add that not all MySuper options would be alike.
“Without doubt, industry funds and retail funds are merging together in terms of the solution that both segments of the industry take to market,” he said.
"But does that mean that all the MySuper options are going to look the same? I don’t think so.
“And that’s where I believe that the end consumer will still have a number of choices that they can make within a MySuper environment,” Lewis explained.
“It will be homogenised to a certain extent, obviously through the mandated design requirements.
“But I believe strongly that for those funds that are going to be successful into the future, there will be characteristics of their MySuper offering that will differentiate and add value in the long term.”
In a similar vein, Schroder said that while there would always be differences between funds and their offerings, the industry’s traditional lines were certainly shifting.
“I think we’re undergoing a seismic change in the nature of the superannuation market,” he said. “And I actually don’t want to understate that.
“There are some really significant things going on all at the same time which will lead us to having a very different industry structure in the not too distant future,” Schroder continued.
“So I think about these kinds of themes: member behaviour and member sentiment is changing; technology is rapidly dominating the sector; and then the regulatory environment has been transformed more in this year than any other year.”
And for Schroder, that change has occurred against the backdrop of what is without doubt a maturing superannuation system.
“There will always be differences between individual funds and there will be differences between different sectors,” he said. “But I think we are seeing a seismic shift in the sector and old titles and the old ways of looking at things won’t work very well in the future.
“So we think that members and employers will make their decisions based on new things in the future, things that will be very different to what they may have considered in the past.”
However, if MySuper is a game changer for both members and super funds alike, so too are APRA’s proposed prudential standards.
Released in November and aimed at providing principles-based standards for the business operations of a super fund, they are a progression that, for Mason, is long overdue.
“Obviously, most trustees and super funds do the right thing,” he said.
“But occasionally APRA comes across funds that aren’t and so they need to have the power to bring those funds into line.
“We’re now a $1.4 trillion industry – this is the retirement savings of the majority of Australians (with the exception of those in self-managed super funds [SMSFs]) – so I think many of the things APRA have required and requested – operational risk reserves, liquidity testing, governance, more rigid and more stringent reviews of risk and management of risk – is good business practice,” Mason continued.
“And you can see that APRA is moving quickly to move super funds into line with other financial institutions, which is not unreasonable when you think that our largest super fund is approaching $50 billion in assets.
“In fact, the retail funds are bigger than that so these super funds, both retail and wholesale, are financial institutions in their own right.”
Echoing Mason, Schroder said that it was entirely appropriate for the super industry to have a robust prudential framework.
“The superannuation sector is very significant to the economy in being $1.4 trillion,” he said.
“And it’s completely to be expected that the Government and regulators would have very strong views about the prudential requirements and the efficiency and effectiveness and issues of risk across the sector.
“So we’re proceeding on the basis that those demands will continue to rise and that we want to make sure that we’re always ahead of that and always able to do the next thing that’s required,” Schroder continued.
“That said, there are fundamental differences between superannuation saving and the banks’ capital models.”
So while banks and insurers are commonly pointed to as the yardstick for the super industry’s prudential standards, Schroder was adamant that each industry’s requirements were inevitably unique.
“They are completely different ways of saving and they are completely different ways of investing,” he said.
“They are in no way like-for-like, so you can’t say ‘let’s use this model’ and impose it on this system.
“But certainly the idea that the same level of scrutiny and the same level of expectation and the same level of transparency and the same level of governance is required – that is all utterly reasonable and to be expected.”
Of course, that different way of investing, as alluded to by Schroder, has provided super funds with its own set of challenges throughout 2012. Few things have characterised the last 12 months so much as the rise of the term deposit, but for Mason, funds’ traditional asset allocations have largely stayed the same.
“My experience with the funds I advise is that they have, in the main, stuck with their asset allocation and for their balanced fund, its been that broad 70/30 split or thereabouts,” he said.
“Most fund executives and trustees seem to have taken the view that history has shown us that markets will bounce back, they always have, and so for those members who have incurred losses over the last few years or very poor performance, to dramatically move away from a current asset allocation to something quite a bit more conservative is, in most cases, just going to compound their losses.”
Speaking to the prevalence of term deposit investments, Lewis said that while funds’ broad asset allocations had remained stable, there had been a noticeable flight to safety and security on the part of members.
“It comes back to member confidence,” he said.
“We’ve seen some improvement in the more traditional investments over the last 12 months, though we’ve still got a way to go, but term deposits are quite obviously a direct result of what happened during the GFC [global financial crisis].
“And the effects of that are going to take a while to wash through, particularly from a confidence perspective,” added Lewis.
“It will take time to convince members that the assets they’ve built up over time aren’t going to be suddenly eroded by another GFC-type event.
“We certainly did have a significant shock and this is the net result of that shock.”
The bottom line, according to Schroder, is that this year has seen a distinct difference between member sentiment and trustee decisions about asset allocation.
“So what we are definitely seeing is a greater interest in certainty and greater concerns about losses amongst a larger group of members than in the past,” he said.
“More members are making investment choices, more members are switching and more members are interested in term deposits and cash and more stable, lower-risk investment choices when they do exercise a choice.
“For the funds though, for those looking out over the horizon and investing for the future, there’s more attention being paid to the long-run portfolio configuration,” Schroder continued.
“So what does the new post-GFC world mean for asset allocation?
“I think there are a lot of funds looking very deeply at their long-term asset configuration and trying to figure out the right setting for the next five or 10 years based on what they’ve learned.”
Yet fund members’ increasing willingness to exercise choice within their superannuation does not necessarily stem from investment market uncertainty alone. For many, the continued growth and popularity of self-managed super funds would also have played a role.
Indeed, for Mason, 2012 has been a year of recognition for SMSFs.
“Yes, I think there’s a recognition that SMSFs are here to stay, that there is something that nearly one million Australians find is better met in an SMSF environment than in the bundled environment of a retail or industry fund,” he said.
“And so we’ve seen a number of industry funds and retail funds introducing an ASX200 option, introducing a term deposit option.
“Now, I think that’s part of the solution, but I think funds still need to understand what it is that people who are attracted to SMSFs are really looking for and to come up with a suitable solution,” Mason continued.
“And perhaps they have to acknowledge in some cases that they can’t.
“If geared property is what you’re looking for, if having the ability to have flexible investments in small cap stocks is what you’re looking for, then yes, you simply can’t do that within a traditional industry, retail or public sector fund.”
According to Lewis, industry and retail funds needed to realise that it was members’ desire for control and ownership that drove SMSF growth.
“So the rest of the segments within the industry, to take that into account, need to make sure that within their industry fund or retail master trust environments, they reinforce in the minds of their clients that they do in fact have the ability to have control and ownership,” he said.
“That’s the key message here.
“And so the question becomes how we can maintain the benefits of group buying power but at the same time, offer them that control and ownership which I believe is what’s driving them into the self-managed super fund market in the first place.”
Offering an entirely different perspective, Schroder said that there were a host of providers in the superannuation industry who were looking at SMSFs for exactly the wrong reasons.
“They’re thinking of SMSFs as some sort of honey pot or some sort of opportunity for them, as an institution, to harvest, to make money from,” he said.
“But I think what’s very entertaining to watch is those big operations who think they’ll have some knock-out, scalable solution for what is completely a fragmented, individually driven, very localised superannuation response.
“SMSFs are a very significant innovation and it’s mostly driven by individuals and their advisers,” Schroder continued.
“But you then get these large organisations saying ‘gee, I can see there’s a third of the money in there, I’d better get in there, this is a really great opportunity’ and it simply doesn’t make sense to me.”
Reiterating the views espoused by both Mason and Lewis, Schroder said that it was absolutely vital that organisations understood why people went down the SMSF path in the first place.
“Some of them might have had something sold to them and some people might have been told something that isn’t quite right, but most of them probably went down that path because they actually wanted to do it themselves without the big providers,” he said.
“So it’s sort of strange to me to say ‘you left our party so we’re going to chase you until you come back to it.’
“AustralianSuper’s view is that the self-managed super fund sector offers opportunities to some investors that they find attractive,” Schroder continued.
“And so what we need to think about is whether we have a role there, could we help or not?
“We’re still very much at that point. But what it has done is help us understand that there are members of our fund who would like us to do more and better things for them and that’s what we’re trying to do.”
So as 2012 comes to a close, it is clear that Australia’s superannuation industry is well placed for the year to come. Yet following 12 months where funds’ focus was almost exclusively legislation and compliance, Mason’s hope is that the industry’s priorities are allowed to change.
“I think 2013, once we get MySuper and Stronger Super largely behind us, has to be about member engagement,” he said.
“It’s an increasingly competitive market so my thought is that we need to get back to how we can better engage with members, how we use digital to better engage, how we ensure they have the information they need when they want it.
“I dearly hope that when the industry reflects next year, that we’ve had a great 2013 of investment returns, that compliance and governance is working well and that the hard work done this year is bearing fruit,” Mason continued.
“I hope that there’s less of a fight between the various sectors of superannuation and more just a general acknowledgement that we’re in a competitive environment, that there are all different sorts of competition, so we need to just concentrate on our product, on selling it and doing our best to communicate that to our members and to engage with our members.
“The emphasis, like any other business, be it a super fund or a retail store or an airline, has to be about engaging with your customers and getting them to choose you over your competitors. And you do that by giving them what they need.”